Low Inflation Bends the Phillips Curve Around the World: Extended Results

23 Pages Posted: 28 Sep 2021 Last revised: 3 Nov 2021

See all articles by Kristin J. Forbes

Kristin J. Forbes

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Joseph Gagnon

Peterson Institute

Christopher G Collins

Board of Governors of the Federal Reserve System

Date Written: September 24, 2021

Abstract

This paper revises and extends PIIE Working Paper 20-6. It continues to find strong support for a Phillips curve that becomes nonlinear when inflation is “low”—which our baseline model defines as less than 3 percent. The nonlinear curve is steep when output is above potential (slack is negative) but flat when output is below potential (slack is positive) so that further increases in economic slack have little effect on inflation. This finding is consistent with evidence of downward nominal wage and price rigidity. When inflation is high, the Phillips curve is linear and relatively steep. These results are robust to placing the threshold between the high and low inflation regimes at 2, 3, or 4 percent inflation or for a threshold based on country-specific medians of inflation. In this nonlinear model, international factors play a large role in explaining headline inflation (albeit less so for core inflation), a role that has been increasing since the global financial crisis.

Keywords: economic slack, globalization, output gap, price dynamics

JEL Classification: E31, E37, E52, E58, F62

Suggested Citation

Forbes, Kristin J. and Gagnon, Joseph and Collins, Christopher G., Low Inflation Bends the Phillips Curve Around the World: Extended Results (September 24, 2021). Peterson Institute for International Economics Working Paper No. 21-15, Available at SSRN: https://ssrn.com/abstract=3930104 or http://dx.doi.org/10.2139/ssrn.3930104

Kristin J. Forbes

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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HOME PAGE: http://web.mit.edu/kjforbes/www

National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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Joseph Gagnon (Contact Author)

Peterson Institute ( email )

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HOME PAGE: http://www.piie.com

Christopher G. Collins

Board of Governors of the Federal Reserve System

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Washington, DC 20551
United States

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